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Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

I’ve been spending a great deal of time with 80- and 90-year-olds recently. My mom (now in her mid-80s) just moved to a new retirement community, and so it’s been a wonderful opportunity to observe older retirees in a personal way. And it’s given me some time to reflect on what I’m calling the “second half” of retirement.

When you arrive at a typical retirement community (and here I’m referring to independent living, not assisted living or nursing facilities), you encounter a wide range of physical and mental health outcomes. There are 95-year-olds who are fit and still driving. There are 75- and 80-year-olds who are frail and need personal support. Some rarely see the doctor except for routine evaluation, while others are constantly in and out of the hospital.

Another issue is declining mental acuity. Academic studies show that the rate of dementia doubles every five years in retirement, so that by your early 80s, the risk of full-fledged dementia is 3 in 10. And while you may avoid clinical dementia, you may be prone to milder forms of cognitive impairment. Contrast that with those who remain intellectually sharp through their later years.

As I’ve learned from several families, once a loved one moves to a retirement community, it’s common to gradually shift financial decision-making to trusted younger family members. I suspect many of our blog readers have had to create similar arrangements with their aging parents. The risk of course is that the designated individual, armed with limited or full powers of attorney, can mismanage the older person’s finances. It can help if caretakers conduct all responsibilities as transparently and openly as possible.

Often, selling a primary residence accompanies the move to a retirement community. Many of the retired folks I speak to are of two minds: they both regret moving out of their home and are simultaneously relieved they no longer have to deal with the responsibility of homeownership.

There’s a lesson here for those of us who are younger—don’t become too attached to your main residence as you approach retirement. And start thinking about this transition long before you need to, as well as related changes to finances and portfolios.

One issue I’ve been thinking about is how the portfolio allocation problem changes later in retirement. When you’re 60 or 65, it’s easy to think about a retirement that might last several decades or more. Your main objective is creating a regular income stream from the resources you have, and also to provide for some growth in capital to offset the rising cost of living.

Yet by the time you’ve reached your mid-80s, if not sooner, the calculus changes a great deal. Time horizons are dramatically shorter (unless you’re thinking of investing for your heirs and beneficiaries). And the analysis very much depends on your resources, living arrangements, and health circumstances.

If an older parent moves in with children, it’s possible to imagine that demand on resources will decline (e.g., free room and board) until additional care is needed. If you have the resources to move into an independent living retirement community, my own family experience is that the resources needed for retirement rise substantially. That’s not your standard model of income in retirement—boost spending by a third or more when you’re in your 80s.

Similarly, when it comes to financing assisted living or long-term care, there are two alternative paths. Those with substantial resources (e.g., greater than $1 million) will pay exclusively for private care from assets. Yet most other households will first pay for private care from assets, and then, when depleted, sign up for Medicaid, the government program that helps pay a large portion of long-term care expenses. Those of you who have been through this already know another life lesson from the second half of retirement: you need to become very familiar with your state’s Medicaid rules.

In the financial services world, we spend a great deal of time helping individuals accumulate and invest savings, and somewhat less helping them make the transition into retirement. In my own view, our thinking about decisions at much older ages remains pretty ad hoc and largely underdeveloped. As the world’s population continues to age, we need some much deeper thinking on the second half of retirement.

Steve Utkus

Steve Utkus oversees the Vanguard Center for Retirement Research, which studies many aspects of retirement in America—from how individuals start saving and investing in the early part of their careers, to how they prepare for actual retirement, to how they spend down their savings once they’re retired.
Steve is particularly interested in behavioral finance—the study of how rational decision-making is influenced by human psychology. His current research interests also include the ways employers design retirement programs, and new developments in retirement in other countries.
Steve holds a B.S. from the Massachusetts Institute of Technology and an M.B.A. from the University of Pennsylvania's Wharton School. He began working at Vanguard in 1987 and has served as director of the Center for Retirement Research since 2001. Steve is also a visiting scholar at the Wharton School.

Comments

Nan B. | June 9, 2014 10:03 am

I read Steve’s article and the many comments with interest. I am 82 and my husband is 84. We own our home and hope to stay here until the end. Some of the suggestions, such as hiring help in place, were what we have in mind. We have all our investments with Vanguard and would like to hear more about investing to insure our assets last as long as we do:-)! I think Vanguard is the greatest.

Sara V. | May 20, 2014 1:37 pm

Steve, I think your emphasis on the 80- and 90-year olds is important and would greatly appreciate more on how to manage into our 80s and 90s, particularly for those of us who have less than $1 million. My husband was in a nursing home for years, and since we had no LT care isurance, it ate up a lot of our savings. At the age of 77, I am now living frugally within my income and reinvesting proceeds so that funds will be avaiable when I need more help. . Behavioral psychology. What aset allocationdoes Vanguard recommend at this stage? I would like to hear from others as to how they manage, or maybe a Vanguard informal survey. My tip: I moved from a high-housing cost area, Los Angeles, to a smaller city (still with a university ) with much lower rents, and that has made budgeting a lot easier.

Martha M. | April 4, 2014 6:31 pm

I would like to see your answers to George J (November 2013). I am in a similar situation, being 82 yrs old, a widow, and live alone. I was in great health until Mr. Parkinson came to visit. Now I worry about the coming years when I am unable to take care of myself. I am quite comfortable now, though not wealthy by any means. I have two V. funds, plus a couple of municipal bond funds and CDs. And my home is paid for. What should I do about investing some stray cash that is in money market funds doing absolutely no good. Preservation of capital is important to me, as is dividend income. I have 6 beautiful grandchildren who may someday need my help.

Richard S. | March 25, 2014 10:19 pm

William R. | December 16, 2013 9:20 pm

Great to see you’re still engaged with clients on important retirement topics. In retirement I have come across many retirees in my age group 70’s) who are not as well positioned (read, not enough money!) as they need to be to really retire and must work part time. I am so frustrated as I get to know them and they reveal their portfolio/IRA holdings. It seems amazing to me that many with near-affluent (250+ k) assets pay sums to advisors and would be better off in a single VGI fund. Any thoughts on how to engage them to connect to Vanguard with some sort of “hand-holding” group to walk them through getting to a better place and escaping the Fear grip that SOME advisors seem to have on these folks.

George J. | November 10, 2013 4:09 pm

Briefly, my fund portfolio has too much risk for my age, 86, with too short a time horizon to hold for recovery when the next bear appears. Worth the risk till now, but must reduce. The IRS gives me a Life expectancy of 14.5 years but I wouldn’t bet on it. I prefer Vanguards funds. I don’t know how to determine my current risk, but it is roughly that of Dan Wiener’s conservative growth model portfolio. Preserving capital is my objective now. My mattress is lumpy enough already, so I’d welcome suggestions on how I can lower my risk to protect what I have. I don’t need income from it and have no debts. Would some mixture of low risk value funds, short term bond funds, and cash make sense? In what proportions? There must be others in a similar situation. Any advice will be appreciated.

Sarah P. | December 10, 2013 3:22 pm

Fred B. | August 24, 2013 11:44 am

Steve – Your article and the follow-up responses were really insightful. As a Long-term Care Ombudsman for 16 years. let me suggest a resource which is available to anyone over 65 Y/O and is generally without cost. Most communities have an Area Agency on Aging which provides counseling re: housing, Medicaid rules & benefits, simple legal services, reverse mortgage lending, etc. through a Legal Services Program and/or an Ombudsman program. Family members and others responsible for the well fare of the Elderly can usually avail themselves of services offered at little or no cost. I’m now 74, my wife is 70, so we can appreciate some of the issues raised by others. The 2nd half is a “for real” scenario, so good advice is an essential. Thanks for helping provide it.

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.